Peter Schiff on Treasury collapse

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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Fri Mar 30, 2012 1:49 pm

My dive into using EE bonds for a chunk of my LTT portion when rates were at 2.76% was timed relatively well... by accident, of course.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Fri Mar 30, 2012 1:57 pm

moda0306 wrote: My dive into using EE bonds for a chunk of my LTT portion when rates were at 2.76% was timed relatively well... by accident, of course.
I never quite understood the swap EE bonds for LTT. Wouldn't you rather have a higher return on your cash than applying a hack to your LTT allocation? Obviously I'm missing something that I haven't considered.
Last edited by Gumby on Fri Mar 30, 2012 1:59 pm, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Fri Mar 30, 2012 2:06 pm

When bonds were yielding under 3% for 30's and 2.5% for 20's, I noticed that a EE bond was a tax-deferred better deal at 3.53% over 20 years.  Of course, it has to be held to maturity to get that yield, so the general rule is 1) use it only as a portion of your bonds.. maybe 20% max, and 2) count some of it as cash, as the required duration isn't there.

This works much better for someone who's in their accumulation phase, as most of their bonds will be held... not used to rebalance.

As you hold them longer and longer, you have to shift more and more of the total value to counting as cash, since there is a shorter duration there to deal with.  But, as you get closer and closer to the doubling of value, the implied rate to the original maturity (20 year mark) goes up and up.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Fri Mar 30, 2012 2:31 pm

Gumby wrote:
doodle wrote: Has anyone heard of this idea before: As long as real economic growth rates are higher than the real interest rate, the economy must have a bubble forming somewhere to function properly. Maybe these "Minsky moments" referred to in the video above are necessary???

http://traderscrucible.com/2011/05/05/c ... his-worth/

I think the premise is that under such a scenario the economy is somehow starved for money and therefore creates its money by bubbling up some particular asset...stocks, houses, etc.

Does the topic of the article make sense to anyone?
Fascinating perspective.

There are many ways to look at these crises. And they all have truths in them, but it's impossible to know which is correct. For instance, here is a very interesting look at the financial crisis from a Marxist perspective. Whether you agree with the perspective or not, the video offers an interesting summary of flaws in our private credit system, as well as covers the different mainstream ways we look at these crises...

[align=center]Image[/align]

(Cool white-board animation too!)

I actually really enjoyed this video — very interesting perspective. If nothing else, the video should explain just how easy it is to form different perspectives of the same problem — which, again, is why the Permanent Portfolio is the best way to navigate these differing opinions.
We often seem to take it as a given that we have turned away from Marxism and that allowing unfettered capitalism may be the source of some of our problems.

However, consider what Marx said were the fundamental tenets of communism in "The Communist Manifesto".  They are as follows:
1. Expropriation of landed property, and the use of land rents to defray state expenditure

2. A vigorously graded income tax

3. Abolition of the right of inheritance

4. Confiscation of the property of all emigres and rebels

5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly

6. Centralization of the means of transport in the hands of the State

7. Increase of national factories and means of production, cultivation of uncultivated land, and improvement of cultivated land in accordance with a general plan

8. Universal and equal obligation to work; organization of industrial armies, especially for agriculture

9. Agriculture and urban industry to work hand-in-hand, in such a way as, by degrees, to obliterate the distinction between town and country

10. Public and free education of all children.  Abolition of factory work for children in its present form.  Education and material production to be combined.
Here are my comments on these requirements for a communist society:

1. Expropriation of landed property, and the use of land rents to defray state expenditure

Comment: Our current property tax system is based on the premise of taking a percentage of property value annually in the form of a tax, along with the rents the federal government takes from use of public lands for things like mineral production and the taxes the government assesses on income generated from the use of real estate in general.

2. A vigorously graded income tax

Comment: We've had this one for years.

3. Abolition of the right of inheritance

Comment: In 2013 the top estate tax rate will be 55%.  If Warren Buffett had his way it would be higher.

4. Confiscation of the property of all emigres and rebels

Comment: "Rebels" of course have their property taken through a variety of legal measures.  "Emigres" are people who attempt to leave a country with their assets.  If you have been paying attention it is impossible not to notice that taking your money out of the U.S. or finding a foreign location where it can be securely stored has gotten much more difficult in recent years.  For U.S. citizens, Switzerland is basically no longer an option at all.

5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly

Comment: The Fed.

6. Centralization of the means of transport in the hands of the State

Comment: The two primary means of transportation in the U.S. are by car and by air.  If you choose to travel by car you must participate in a variety of state sponsored registration, tracking and tax/fee arrangements.  You must register yourself and pay a fee to get a drivers license and you must register and pay a fee to have a street legal vehicle to drive.  The drivers license database has proven to be a wonderful tool for use by the state in tracking people and the public roads have proven to be a wonderful tool to periodically detain people as needed.  The air travel system is many times worse in terms of state control, surveillance and use of this transportation tool as a way of tracking people and detaining them when the state deems it to be necessary.

7. Increase of national factories and means of production, cultivation of uncultivated land, and improvement of cultivated land in accordance with a general plan

Comment: Although farmers probably just see it as successful political lobbying, the system of land cultivation in the U.S. is basically one giant government program.  As far as the means of production generally, the U.S. tax code has clearly been used to manipulate the allocation of capital and it has ironically pushed a lot of factory production to another country that explicitly calls itself communist.

8. Universal and equal obligation to work; organization of industrial armies, especially for agriculture

Comment: This one is not occurring in a way that I can see, though one interpretation of the governmental bureaucracy is that it is a giant make work program for many otherwise un-employable people.  As far as agriculture goes generally, the automation of so many farm functions makes the "agricultural army" a basically obsolete concept (for now, anyway).

9. Agriculture and urban industry to work hand-in-hand, in such a way as, by degrees, to obliterate the distinction between town and country

Comment: I would say that globalization in general has been targeted at achieving this goal.

10. Public and free education of all children.  Abolition of factory work for children in its present form.  Education and material production to be combined.

Comment: This one is exactly what has happened, and it has been predictably used to indoctrinate children into a certain worldview that in the social sciences is based on many fantasies and distortions of history and reality with a strong tilt toward statism as the natural configuration of society.

***

The next time someone says something negative about Marxism and how the U.S. won the fight against communism, you might ask them which aspects of Marx's description of communism we defeated and what specifically about Marx's philosophy they disagree with.

It is bizarrely ironic that some of the richest people in the world today are accumulating their wealth in economies that are either currently or recently considered "communist" (e.g., China and Russia).  In our own country, it seems as if many corporations have concluded that it makes more sense to embrace communist principles by attempting to influence government policy to help protect them from additional competition in certain markets, rather than seeking less government involvement in the economy generally.  Companies will say they want less regulation, but where regulation provides them with a competitive advantage, they rarely want that type of regulation relaxed.  I seriously doubt, for example, if financial institutions would be very excited if the government said it would no longer backstop their operations in the form of deposit insurance, bailouts and the Fed as lender of last resort.
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Re: Peter Schiff on Treasury collapse

Post by Tyler » Fri Mar 30, 2012 4:08 pm

"But I'm wondering the PP would look like if he is correct?"

I'm not an economist, and have no real interest in macro predictions.  This guy may be a genius who will be proven 100% right.  Who knows.

But that's the reason I like the PP in the first place -- I'm pretty confident that no matter what happens we're about as well positioned to handle it as anyone can reasonably expect. 
jackely

Re: Peter Schiff on Treasury collapse

Post by jackely » Fri Mar 30, 2012 4:16 pm

Tyler wrote: I'm not an economist, and have no real interest in macro predictions.  This guy may be a genius who will be proven 100% right.  Who knows.

But that's the reason I like the PP in the first place -- I'm pretty confident that no matter what happens we're about as well positioned to handle it as anyone can reasonably expect. 
I'n not an economist either, nor did I stay at a Holiday Inn Express last night, but I did buy a house in 2006. I now wish I had paid more attention to people like Mr. Schiff at a time when most other experts were scoffing at the very idea of a housing bubble, kind of like some people in this forum are assuring me  there is no such thing as a Treasury collapse.

I hope they are right but I agree with you about the PP. Still seems like the most reasonable way to weather through all the possible storms.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Fri Mar 30, 2012 5:00 pm

jackh wrote:
Tyler wrote: I'm not an economist, and have no real interest in macro predictions.  This guy may be a genius who will be proven 100% right.  Who knows.

But that's the reason I like the PP in the first place -- I'm pretty confident that no matter what happens we're about as well positioned to handle it as anyone can reasonably expect. 
I'n not an economist either, nor did I stay at a Holiday Inn Express last night, but I did buy a house in 2006. I now wish I had paid more attention to people like Mr. Schiff at a time when most other experts were scoffing at the very idea of a housing bubble, kind of like some people in this forum are assuring me  there is no such thing as a Treasury collapse.

I hope they are right but I agree with you about the PP. Still seems like the most reasonable way to weather through all the possible storms.
Schiff has clearly made some great calls.

But he has also made some terrible calls.

The problem is it would have been impossible to know which ones were great and which ones were terrible beforehand.
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Re: Peter Schiff on Treasury collapse

Post by Kshartle » Fri Mar 30, 2012 5:15 pm

I consider myself a student and fan of both Peter and Harry, having read all of their works, and actually speaking with Peter on one occasion as a caller into his radio show. As far government goes, I agree with Harry completely that government plays no beneficial role in society whereas Peter argues that some government "services" are vital and encourages political engagement (he is a Ron paul campaigner and former Senatorial candidate himself). So from a philosophical point of view Harry is light years ahead of Peter.

When it comes to economics however......there is no comparison. Harry tries to make the point that there is no value in attempting to allocate resources into asset classes that the investor expects to outperform. This might make sense if the investor is only concerned with the stability of the principle in dollar terms. It does not make sense if someone is generally trying to add significant wealth with ones investments. The Permanent portfolio will never do this. It can't except possibly over a very long period of time. With the 50% allocation to government bonds it's unlikely even over the long-term.
Peter is looking at the massive government debt and the crushingly low interest rates which make it rather obvious that stocks and gold will outperform in the long run. The fed has promised low interest rates through 2014. Many of the members are calling for low rates through 2015 or 2016. If they carry out their promise they must create inflation and push up gold just to maintain the pitiful interest rates. The US government cannot maintain it's spending without additional borrowing so the political pressure on the Fed will be powerful. Investors holding dollars will be punished. His premise on foreign stocks and gold are very sound. If you listen to him he will say over and over that he doesn’t believe anyone can call a top or a bottom. Short term movements are impossible to predict and even medium-term movements are incredibly difficult. It’s the long-term movements based on sound economic principles that he’s talking about. Making a call on 2013 or 2014 as the bursting year of the treasury bubble is a bold statement but remember, he has a book coming out, a radio show, an unconventional message that is in direct opposition to the government cheerleaders on CNBC and everywhere else.

I believe he’s correct and own no treasuries myself. I love the permanent portfolio concept for retirees unable to handle significant fluctuations emotionally. If interest rates move above 10% and the government starts operating in a surplus then it would be a brilliant strategy for everyone.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Fri Mar 30, 2012 5:25 pm

Kshartle wrote: I consider myself a student and fan of both Peter and Harry, having read all of their works, and actually speaking with Peter on one occasion as a caller into his radio show. As far government goes, I agree with Harry completely that government plays no beneficial role in society whereas Peter argues that some government "services" are vital and encourages political engagement (he is a Ron paul campaigner and former Senatorial candidate himself). So from a philosophical point of view Harry is light years ahead of Peter.

When it comes to economics however......there is no comparison. Harry tries to make the point that there is no value in attempting to allocate resources into asset classes that the investor expects to outperform. This might make sense if the investor is only concerned with the stability of the principle in dollar terms. It does not make sense if someone is generally trying to add significant wealth with ones investments. The Permanent portfolio will never do this. It can't except possibly over a very long period of time. With the 50% allocation to government bonds it's unlikely even over the long-term.
Peter is looking at the massive government debt and the crushingly low interest rates which make it rather obvious that stocks and gold will outperform in the long run. The fed has promised low interest rates through 2014. Many of the members are calling for low rates through 2015 or 2016. If they carry out their promise they must create inflation and push up gold just to maintain the pitiful interest rates. The US government cannot maintain it's spending without additional borrowing so the political pressure on the Fed will be powerful. Investors holding dollars will be punished. His premise on foreign stocks and gold are very sound. If you listen to him he will say over and over that he doesn’t believe anyone can call a top or a bottom. Short term movements are impossible to predict and even medium-term movements are incredibly difficult. It’s the long-term movements based on sound economic principles that he’s talking about. Making a call on 2013 or 2014 as the bursting year of the treasury bubble is a bold statement but remember, he has a book coming out, a radio show, an unconventional message that is in direct opposition to the government cheerleaders on CNBC and everywhere else.

I believe he’s correct and own no treasuries myself. I love the permanent portfolio concept for retirees unable to handle significant fluctuations emotionally. If interest rates move above 10% and the government starts operating in a surplus then it would be a brilliant strategy for everyone.
A Japanese investor could have made the same argument above in 1992 and would have been crushed as stocks continued to drift lower for 20 years, while Japanese government bonds continued to provide outstanding returns.

Japan never has had the inflation that Schiff's thesis suggests is inevitable.

In the U.S., over the last 30 years long term treasuries have outperformed stocks, and that period includes one of the greatest bull markets for stocks in history.

I understand the logic of what you are saying, but reality still has a way of surprising us.
Last edited by MediumTex on Fri Mar 30, 2012 11:30 pm, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Fri Mar 30, 2012 5:31 pm

If the gov't starts running surpluses and the fed raises rates to 10%, I'm not sticking with the PP, I'm putting all my money in T-Bills, selling my house, and finding out how to prepare for 20% unemployment.   ;D

All kidding aside, if there's anything imagineable that would slaughter the PP, it's a huge hike in ST interest rates... gold would plummet, LTT's would plummet (if the market believed this to be a longer-term move), and stocks would plummet.  It would be 1981 on steroids... especially if you balance the budget to boot.
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Re: Peter Schiff on Treasury collapse

Post by Kshartle » Fri Mar 30, 2012 10:37 pm

MediumTex wrote:
A Japanese could have made the same argument above in 1992 and would have been crushed as stocks continued to drift lower for 20 years, while Japanese government bonds continued to provide outstanding returns.

Japan never has had the inflation that Schiff's thesis suggests is inevitable.

In the U.S., over the last 30 years long term treasuries have outperformed stocks, and that period includes one of the greatest bull markets for stocks in history.
Well.......JPY 10 yr bonds have been 2% or less since '98 so definately not outstanding. They've been at 1% for about half of the last decade.

As for LTTs beating the US stock market over the last 30 years......this is a strong case for the treasury bubble argument, not a case for buying treasuries. The 30 year yield was a little over 13% in Dec of '81 and so the returns on a LTT fund have averaged 13% since then. They are at 3.4% now and so that will be the average for the 30 years of TLT or whatever. I'm not saying the US stock market will beat that. It might just based on the inflation needed to keep the rates down. Schiff isn't arguing that US stocks are the place to be though. He's arguing for investment in non-US countries that meet the following criteria:

From the Europac site:
Country Selection
The team reviews and focuses on the countries it views to have the best
fundamentals. Selection criteria include
- an expected 1-2 year trade surplus
- high real interest rates
- low debt-GDP ratio
- favorable real GDP growth estimates
- stock market price-to-earnings valuations that are attractive
relative to expected earnings growth.

As far as inflation in Japan.......the Japanese have printed trillions upon trillions to weaken the Yen and prop up the dollar for a long time now. Imagine how much the Yen could have appreciated in that time and low prices could have fallen for the Japanese without non-stop intervention from their banks. No wonder their economy has been stagnent for so long. The BOJ won't let interest rates rise and the economy re-structure, just like the fed. Don't confuse rising prices and inflation. The Japanese have had massive inflation inflicted upon them by the BOJ to their detriment.

The Japan-US comparisons fail in my opinion since the only thing in common is the high government debt. The Japanese are still barely net exporters I think but for most of this time were big exporters with a high savings rate and very little foriegn ownership of their debt and low unemployment. They are quite different than the US but I'm staying away until the BOJ lets rates rise. Here's an article I found interesting:

<http://www.europac.net/commentaries/bottom_line_9>
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Re: Peter Schiff on Treasury collapse

Post by Kshartle » Fri Mar 30, 2012 10:57 pm

moda0306 wrote: If the gov't starts running surpluses and the fed raises rates to 10%, I'm not sticking with the PP, I'm putting all my money in T-Bills, selling my house, and finding out how to prepare for 20% unemployment.   ;D

All kidding aside, if there's anything imagineable that would slaughter the PP, it's a huge hike in ST interest rates... gold would plummet, LTT's would plummet (if the market believed this to be a longer-term move), and stocks would plummet.  It would be 1981 on steroids... especially if you balance the budget to boot.
If you count government workers.....the military.....the underemployed and those who've quit looking we're probably damn near 50% right now. Not to mention all the people going back to or staying in school because there's no work.

If the government was running surpluses and rates were over 10% I bet dividends would be quite high and P/Es in the single digits suggesting the stock market as a much better play so let's hope you don't abandon stocks entirely.  :o

We had a pretty good hike in interest rates during the 70s already and the PP averaged double digit returns, keeping ahead of inflation as billed. This was of course due primarily to gold.

10% interest rates and a balanced budget are not what we have to fear. The reason I won't touch the PP and consider it too risky is because of the suppression of interest rates. As long as the government distorts the market and prints and keeps rates low the US will not prosper and the dollar will continue it's 40 year descent. With the occasional bear market rally like we saw for the last of 2011 of course.  :)

Schiff will say over and over during his broadcasts that he only concerned with being on the right side long-term. He's not worried about short-term movements since that can't be predicted or even keeping score in yearly increments like I think most of us are obbsessed with. Treasuries can rally sure.....but sooner or later the bondholders and US stockholders are going to feel the pain of either higher rates or a rapidly depreciating currency.

I think he's right and let me tell you his books are every bit as good a read as Browne's. Pick 'em up guys I urge you.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Fri Mar 30, 2012 11:04 pm

Kshartle wrote:and the government starts operating in a surplus
A surplus is when the government is taking in more money through taxes than it spends. All a surplus does is suck base money out of the private sector — which is only useful when high inflation is beginning to take hold.

Since our entire money supply (except coins) comes from debt, it's pretty much impossible for the government to run a surplus for more than a very short amount of time without completely removing the base money supply from the private sector.

The Treasury only accepts base money when you pay taxes or buy government securities (i.e. the Treasury can't receive bank credit.). Every dollar of base money that is removed from the private sector reduces private credit by much, much more. The money to pay taxes, and buy government securities, literally comes from previous government spending base money into existence and offsetting it with debt. There can be no other way with the debt-based monetary system we currently have.
Kshartle wrote:I think he's right and let me tell you his books are every bit as good a read as Browne's. Pick 'em up guys I urge you.
Hardly. Schiff resorts to fear mongering. He really doesn't understand the operational side of the Treasury and the Fed. He thinks that the government needs to have "revenue" to spend. It doesn't. He thinks that the US could be the next Greece. That is fundamentally false, as Greece is a currency user and not a currency issuer. He thinks the Fed could monetize the debt. It can't. The Fed actually can't conduct its operations with the private sector without government debt existing in the first place.

If you sit around predicting a bubble and a subsequent crash, you will eventually be correct. It's like predicting a hurricane. Eventually hurricane season arrives and you're proven correct.

This is not to say that Peter Schiff isn't skilled at seeing storms brewing on the horizon. He knows a private credit bubble when he sees one. I'll give him that. And as Minsky theorized over 50 years ago, these private credit storms are often fueled by the leveraging of safe and risk-free government securities. So, there is likely a strong relationship between high deficits and private credit bubbles.
Last edited by Gumby on Fri Mar 30, 2012 11:34 pm, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by Kshartle » Fri Mar 30, 2012 11:57 pm

Please educate me on why we need a government deficit to prevent the money supply from being extinguished? Where are all these dollars going to go?

Fear mongering? Ok, let's call him a do-do head and then move on.



He thinks that the government needs to have "revenue" to spend.
No he central thesis is that the government is spending way beyond it's revenue and that's the problem.

  He thinks that the US could be the next Greece. 
No I've heard him say many times that he thinks Greece is better off because they can't issue their own currency so they are forced to cut spending. The US Gov't has the printing press at it's disposal and that's an option he believes in much worse than drastic government spending cuts.


  The Fed actually can't conduct its operations with the private sector without government debt existing in the first place. 
Six in one and half a dozen in the other. The fed purchases bonds which increases their price and lowers the yields and permits the government to borrow more by lowering the borrowing costs. If you don't think he understands how it works then I have to question how much you've ever read or listened to him.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Sat Mar 31, 2012 12:00 am

Kshartle wrote: As for LTTs beating the US stock market over the last 30 years......this is a strong case for the treasury bubble argument, not a case for buying treasuries.
So what?  We live in an economy of serial bubbles.  The name of the game is to harvest gains, not make judgments about what's a bubble and what's not.

If one asset outperforms another asset, it doesn't really matter why.  What matters is whether you were able to capture any of those gains.
The 30 year yield was a little over 13% in Dec of '81 and so the returns on a LTT fund have averaged 13% since then.
That's not how it works.  The returns on a bond fund are going to be a combination of interest payments and capital gains from interest rate moves (assuming the moves are down).  What rates were in 1981 only influenced bond returns in 1981.  What rates were in 1982 influenced bond returns in 1982, etc.
They are at 3.4% now and so that will be the average for the 30 years of TLT or whatever.
The returns on 30 year bonds will always be determined by interest rate moves more than the yield itself.  For example, long term treasuries were yielding around 4.5% at the beginning of 2008 and ended the year at 2.7%  This 180 basis point drop in yields translated into a 35%+ gain in long term treasuries in 2008.  Long term treasuries did something similar in 2011 as well.  All of these huge gains occurred with yields that were below 4%.
I'm not saying the US stock market will beat that. It might just based on the inflation needed to keep the rates down. Schiff isn't arguing that US stocks are the place to be though. He's arguing for investment in non-US countries that meet the following criteria:

From the Europac site:
Country Selection
The team reviews and focuses on the countries it views to have the best
fundamentals. Selection criteria include
- an expected 1-2 year trade surplus
- high real interest rates
- low debt-GDP ratio
- favorable real GDP growth estimates
- stock market price-to-earnings valuations that are attractive
relative to expected earnings growth.
People who followed Schiff's advice have done much worse than a person who bought the PP.  I get the idea, it just hasn't worked out the way Schiff said it was supposed to, especially in 2008 when Schiff was getting so much press after his great housing calls.
As far as inflation in Japan.......the Japanese have printed trillions upon trillions to weaken the Yen and prop up the dollar for a long time now.
The yen has not weakened, though.  It has strengthened.  The dollar has weakened as the yen has strengthened.
Imagine how much the Yen could have appreciated in that time and low prices could have fallen for the Japanese without non-stop intervention from their banks.
The yen has strengthened and Japanese prices have fallen. 
The BOJ won't let interest rates rise and the economy re-structure, just like the fed. Don't confuse rising prices and inflation. The Japanese have had massive inflation inflicted upon them by the BOJ to their detriment.
How would rising interest rates help the Japanese economy?  I'm not following how Japan has had massive inflation when prices have been stable or drifting lower for over 20 years.  What you may be describing is a central bank effort to combat contracting private sector credit through the expansion of public debt, but that's not what I would call "inflation."  If private sector debt contracts and public sector debt expands, doesn't that leave the money supply more or less where it started?  That's not inflation.
The Japan-US comparisons fail in my opinion since the only thing in common is the high government debt.
The two countries have a similar demographic profile, have similar central bank policies, have similar problems with zombie banks, have similar problems with overvalued real estate.  There are many similarities.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Sat Mar 31, 2012 12:12 am

Kshartle wrote: Please educate me on why we need a government deficit to prevent the money supply from being extinguished? Where are all these dollars going to go?
Many of the dollars will simply disappear as private sector debt contracts if the government does not take some action to prevent a deflationary spiral from gaining traction.  It was a failure to understand this process in the 1930s that made the U.S. Depression so bad.
Fear mongering? Ok, let's call him a do-do head and then move on.
Schiff is an entertainer.  You know that, right?  His schtick is fear.
He thinks that the government needs to have "revenue" to spend.
No he central thesis is that the government is spending way beyond it's revenue and that's the problem.
The government does not have any "revenue."  Where would such "revenue" come from?  In a fiat system the government can issue as much money as it needs.  It doesn't rely on any third party for "revenue."  Tax collection is just another way to regulate the money supply.  That is its only function.  The government doesn't need your "money."  It has plenty.
  He thinks that the US could be the next Greece. 
No I've heard him say many times that he thinks Greece is better off because they can't issue their own currency so they are forced to cut spending. The US Gov't has the printing press at it's disposal and that's an option he believes in much worse than drastic government spending cuts.
Government austerity measures to maintain an artificial currency peg are a cruel and pointless exercise.  The answer in such a situation is to break the currency peg, and the sooner the better.  Greece doesn't need austerity, what they need is to get rid of the boat anchor around their ankle in the form of the euro.
  The Fed actually can't conduct its operations with the private sector without government debt existing in the first place. 
Six in one and half a dozen in the other. The fed purchases bonds which increases their price and lowers the yields and permits the government to borrow more by lowering the borrowing costs. If you don't think he understands how it works then I have to question how much you've ever read or listened to him.
If he understands it so well, then why have his interest rate calls been consistently wrong for the past several years?  He says rates are about to go up and then they go down.
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Re: Peter Schiff on Treasury collapse

Post by melveyr » Sat Mar 31, 2012 12:20 am

Some interesting Japan graphs...

Note: This cannot be unseen and might lead to a different perspective, and possible brain re-wiring.

Image
Image

Notice how expansions in the money supply do not always result in inflation. There is always supply and demand at play. Schiff is focusing on supply while ignoring demand (among other more fundamental failings).
everything comes from somewhere and everything goes somewhere
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Re: Peter Schiff on Treasury collapse

Post by Kshartle » Sat Mar 31, 2012 7:43 am

Expansions in the money supply IS inflation. Inflation does not always result in rising prices. Schiff isn't ignoring that at all. Youtube "Schiff on Japanese Inflation" or something like that. I listened to him speak on the very subject a few months ago and explain all of this.

Inflation is when the money supply is blown up. As technology and productivity increases prices should natually FALL. Sometimes governments use inflation to spend and spend but the result is not higher prices so the people don't realize how the central bank is punishing them for holding their currency and being savers. The government steals their purchasing by not allowing prices to fall like they should in a free market.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Sat Mar 31, 2012 8:05 am

Kshartle wrote: Please educate me on why we need a government deficit to prevent the money supply from being extinguished? Where are all these dollars going to go?
The entire money supply, except coins, is backed by debt. See, Wikidedia:
A debt-based monetary system is the system where paper money is supplied as a bill of credit to an economy primarily by the purchase of debt, such as government bonds. This form of money is called "debt-based" because as a condition of money creation, it is required to be paid back at some point in the future, usually with interest. A monetary system that introduces full-reserve banking into the system is still "debt-based" if the economy's base money remains a creation of government debt.

When coupled with fractional reserve banking, this system becomes a credit-based monetary system, where both paper money and bank credit are supplied as interest bearing debt. Some economic and political commentators believe that debt-based paper money and fractional reserve banking together cause several economic problems such as, high government spending for debt servicing, economic recessions and depressions, and the consequent loss of property by borrowers during the downturn.

In contrast, a debt-free monetary system is the system where paper money is supplied as a bill of exchange to an economy primarily by capital expenditure. Banks are prohibited from lending at interest, and are required to apply 100% reserve banking.

Source: http://en.wikipedia.org/wiki/Debt-based_monetary_system
In other words, all our money, except coins, is backed by debt debt. During the Civil War, Lincoln issued pure, debt-free, Greenbacks to finance the Civil War. They were very popular, and helped the government run a surplus. However, bankers wanted them retired so that they could maintain their grip on a debt-based and credit-based economy — which is something that dates back to 1694, when the Bank of England was formed. Our monetary system has been continuously debt-based since 1864, when bankers pushed the National Bank Act through Congress.
In numerous years following the [Civil] War, the Federal government ran a heavy surplus. It could not [however] pay off its debt, retire its securities, because to do so meant there would be no bonds to back the national bank notes. To pay off the debt was to destroy the money supply. — John Kenneth Galbraith
Kshartle wrote:He thinks that the government needs to have "revenue" to spend. No he central thesis is that the government is spending way beyond it's revenue and that's the problem.
If the government only spends what it takes in, that won't cause a surplus. You'll still have debt, and the only way to pay the interest payments on that debt is to have more debt. That's how the system was designed.

The government doesn't need revenue. In fact, it can't use revenue if it needs to ever increase the money supply for economical reasons. It's nonsensical. Where would the money come from? (You can't use private bank credit to back the base money). The government doesn't need revenue. Does a stadium need to collect points from the crowd when it issues points on its scoreboard? No, of course not. That's how debt-based fiat money works. When the government spends money into existence, it just changes numbers in your bank's reserve account at the Fed. When you pay your taxes or buy government securities, the Treasury just erases money from your bank's reserve account at the Fed. It's just part of a spreadsheet. The Treasury issues its "debt" securities whenever it spends, and the banking system is obligated to funnel our saved government spending into risk-free Treasuries as an exercise to set interest rates. The system is designed not to fail.

Peter Schiff does not understand the operational side of the monetary system. Here is a recording of Warren Mosler trying to explain this to Peter Schiff on Schiff's radio show...

http://fetch.noxsolutions.com/schiff/au ... 111711.mp3

As Mosler attempts to teach Schiff on how the monetary system works, he constantly interrupts Mosler and talks over him — never learning anything or hearing what he has to say. Hardly the qualities of someone who wants to have a real discussion or hear a different perspective.
Kshartle wrote:  He thinks that the US could be the next Greece.  
No I've heard him say many times that he thinks Greece is better off because they can't issue their own currency so they are forced to cut spending. The US Gov't has the printing press at it's disposal and that's an option he believes in much worse than drastic government spending cuts.
Really? Better off?? The people in Greece do not seem very happy. In fact, they are literally rioting in the streets and highly unemployed.
Kshartle wrote:  The Fed actually can't conduct its operations with the private sector without government debt existing in the first place.  
Six in one and half a dozen in the other. The fed purchases bonds which increases their price and lowers the yields and permits the government to borrow more by lowering the borrowing costs. If you don't think he understands how it works then I have to question how much you've ever read or listened to him.
Sorry, but Schiff often exclaims that the Fed is "monetizing the debt". He has no clue what he is talking about. He actually said it on that recording I've posted above. It's not true. He is misleading you and his listeners with that myth. The Fed doesn't have the power or authority to monetize the debt. Only the Treasury can monetize the debt. The Fed doesn't even have the power to conduct helicopter drops — the Fed can only conduct asset swaps. This is why it's a challenge for the Fed to create inflation. Only the Treasury can conduct a helicopter drop the increases net financial assets in the private sector.

Schiff is skilled at fear mongering and spreading myths. That's his expertise.
Last edited by Gumby on Sat Mar 31, 2012 10:19 am, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Sat Mar 31, 2012 8:12 am

Kshartle wrote: Expansions in the money supply IS inflation.

...

Inflation is when the money supply is blown up.
Really? Because every economics textbook defines inflation as...
Definition of 'Inflation'
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling


Source: http://www.investopedia.com/terms/i/inf ... z1qhRbu3Th
...which is clearly not what Peter Schiff is telling you.
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Re: Peter Schiff on Treasury collapse

Post by jackely » Sat Mar 31, 2012 9:30 am

moda0306 wrote: All kidding aside, if there's anything imagineable that would slaughter the PP, it's a huge hike in ST interest rates... gold would plummet, LTT's would plummet (if the market believed this to be a longer-term move), and stocks would plummet.  It would be 1981 on steroids... especially if you balance the budget to boot.
Wouldn't this be an instance in which the cash portion of the portfolio would hold down the fort? I remember my parents getting 18% on CD's back in 81.
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Re: Peter Schiff on Treasury collapse

Post by Gumby » Sat Mar 31, 2012 9:54 am

jackh wrote:I'n not an economist either, nor did I stay at a Holiday Inn Express last night, but I did buy a house in 2006. I now wish I had paid more attention to people like Mr. Schiff at a time when most other experts were scoffing at the very idea of a housing bubble, kind of like some people in this forum are assuring me  there is no such thing as a Treasury collapse.
No one is saying that Treasuries can't fall 50% or 80% in value. Of course they can. But, this idea the government won't be able to pay its bills is ridiculous. Treasuries have zero credit risk. The debt could be $800 quadrillion and China could stop buying our Treasuries and the government would still be able to pay its bills and all of the interest payments.

See:

Who Will Buy The Bonds
Who Bought All Those Bonds
Breaking News: "Bankrupt" Nation's Bond Auction 3x Oversubscribed
The NY Fed Explains How the Government Spends First and Issues Bonds Later

If you read those articles, you will begin to see that Treasury auctions are specifically designed not to fail. They are always 2 or 3 times oversubscribed. The government spends base money into existence, and that very same base money is used to pay taxes and purchase Treasury bonds. The Primary Dealers are obligated to help them do this and set interest rates in the process. If the Primary Dealers were ever in a position where they could not find the reserves to fulfill their obligations, the Treasury would simply delay the auction or the Fed would loan short-term liquidity to the Primary Dealers.

This is not to say that having an $800 quadrillion deficit is a good idea. It's certainly not a good idea right now. But, there is no solvency issue for the United Stated. Schiff may understand the housing bubble, but he has no idea how Treasury auctions work. He often misconstrues the facts — to sell more books.
Last edited by Gumby on Sat Mar 31, 2012 10:08 am, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Sat Mar 31, 2012 10:06 am

jackh,

As much holding down the fort as can be done by the least volatile asset in the group in a deflationary recession with artificially astronomical interest rates.  The rest of the portfolio would be losing in droves... 10% per year wouldn't float the PP in my estimation.

kshartle,

If the government is simultaneously pulling base money out of the private sector (definition of a surplus), AND significantly tightening lending (10% ST rates), You're right, we might see insanely low p/e ratios and large dividends.... AFTER the S&P goes to 300.  Where's all this money and velocity supposed to come from when the government is pulling base money out and significantly tightening the credit environment?

I think maybe you've been in an Austrian echochamber for a bit too long and have to expose yourself to some other economic thinking.  No offense or anything, but you seem to have the same predisposed opinions about things that I had coming into economics with limited exposure to economic perspecitives... though from a different political angle.

If expansion of the money supply is the definition of inflation (it isn't, in any useful sense, whatsoever... but I'll humor you if you'll humor me on this next part), and treasury bonds are a form of government-issued fiat money (they are), then QE is not printing money.  The fed, when it trades $$'s for bonds, is accomplishing zero inflation.  However, the mining of gold IS inflation, under your definition.  So using your definition of inflation, mining gold was more inflationary than anything the fed has done that Peter Schiff has freaked out about.

All in all, though, I can promise you there's a world of macroeconomics out there that you should expose yourself to that will help put things in perspective, even if you keep your original base opinions on the role of government.  I'd recommend the following blog: http://monetaryrealism.com/recommended-readings/.
Last edited by moda0306 on Sat Mar 31, 2012 10:11 am, edited 1 time in total.
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Re: Peter Schiff on Treasury collapse

Post by MediumTex » Sat Mar 31, 2012 10:38 am

One thing that Peter Schiff does that Gumby touched on above is he has a tendency to try to "win" arguments by simply talking over other people, interrupting them, and not allowing them to complete their arguments.

Other than being annoying, any time I see this tendency in a person it tells me that they aren't listening to what the other person is saying.  If you won't let a person finish his thought, how could you be really listening to what he is saying?

What's especially bad about this tendency not to listen to other points of view, however, is that it can condition your followers to approach other points of view in the same way.

I don't want to be too hard on Schiff, though, so let me say something nice as well.  His beatdown of Art Laffer on Kudlow's show a few years ago was awesome.  Laffer is such a smug ideologue it was great to see his arrogance exposed.  IMHO, the "Laffer Curve" is one of the dumber and more useless economic ideas out there.  I have no doubt that there is some ideal tax rate that will result in the maximum amount of tax collections, but there is no reason to suggest that tax collections would follow a "curve" based upon different rates.  If you could ever collect the data to graph such a thing (even though you can't) I am pretty sure that it would look more like a heart rate monitor than a "curve".
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Re: Peter Schiff on Treasury collapse

Post by moda0306 » Sat Mar 31, 2012 10:41 am

Gumby,

Great point on Peter's ability to identify a credit bubble.  All basic micro indicators were screaming at us that there was an unsustainable housing bubble... even with the reduced interest rates and tax-deductibility, there was no justification for the prices being paid.  Somebody looking at a price/rent or debt-to-income ratio chart could see that unless rents & incomes were to rise substantially, the prices were simply too high.

So step 1: someone could obviously see there was a problem.  But I still give Schiff a slight, asterisk-laden tip of the cap for having the balls to scream it from the mountain tops.

But as you point out, his suggestions on how to hedge against it were completely off base.  Why?  Because he doesn't understand macro.  This is a point of pride in the Austrian community... they don't accept that things are different on a macro level than a micro level.  That's fine for personal philosophy, but when you're trying to make money on predictions, it might help to realize that there's a difference between one person getting in the left lane to go faster, and the entire freeway trying to get into the left lane to go faster.

MT... yes, his beat down of Laffer was amazing.  If I'd seen that then I probably would have sold my home then and become one of his avid followers...
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